This article originally appeared August 11, 2020 in the North Bay Business Journal.
Cash is king. That business aphorism is truer than ever in the coronavirus pandemic. And wine industry advisers say that cash forecasting and management will be one of the most important tactics vintners and grape growers can employ to survive this unprecedented economic shock and its continued reverberations in consumer behavior.
While the basics of budgeting are well known, they can be leveraged to plan for having enough funds for the fast approaching harvest and reaching consumers where they’ve gone since the COVID-19 outbreak began in March, according to Terry Hill, a partner in BPM’s advisory practice. Relative revenue run rates, margins, unit economics and other components of a business’ cost structure can be plugged into cash forecasting models.
“You’re not going to get it all right, but you have to take a position with the best informed assumptions and compile the data in a way that it can be revisited early and often,” said Hill. He has spoken on the topic repeatedly in the past few months in webinars put on by the Business Journal, Nasdaq and Wine Business Institute.
It may be tempting to think that the sudden stop to major sectors of the economy with the coronavirus lockdowns, including key wine sales channels of restaurant indoor dining and tasting rooms to varying degrees, means that past isn’t prologue for the future expectations for a vintner or grower. Yet that’s not necessarily true for cash forecasting, according to Bill Vyenielo, a senior business consultant for accounting advisory Moss Adams.
“Past performance is grounded in reality,” he told the Business Journal. “There is some foundation where you can make informed decisions.”
Helpful for forecasting are the last two or three years of costs per unit — cost per case for wineries or farming cost per acre for vineyard operators.
“A lot those costs don’t vary dramatically,” Vyenielo said.
Hill suggests vintners ask themselves these five questions when developing their cash forecasts:
- How will revenue be affected and in which categories and channels, with what customer demographics?
- How does a concentration into specific categories affect overall selling margins? For example, do higher-end products garner more margin?
- Where will you have one-time, extraordinary expenses, and how much are they?
- For direct-to-consumer sales, do you need to double down on costs of customer acquisition to take advantage of the current dynamics?
- To the extent that the 2018 and 2019 harvests and declined sales have the business long on supply, how do growers deal with destabilized pricing next few years?
And the importance of forecasting cash needs is realizing when the business will need more of it, so lenders won’t be surprised with requests for advances on lines of credit or capital expenditure loans, according to Vyenielo.